Of all the major changes to superannuation coming this year, probably the most confusing is the new “transfer balance cap”. In this article we’ve answered the most common questions to help you understand how it will work and to plan ahead.
What is the transfer balance cap?
The transfer balance cap is a new limit on the total amount of superannuation savings that can be transferred from an accumulation account to a tax-free retirement account. It’s a lifetime cap that applies on a per person basis, regardless of the number of superannuation accounts you have. It comes into force on 1 July 2016.
How much is the cap?
Initially it will be $1.6 million. It will increase in line with the Consumer Price Index in $100,000 steps. At the current rate of inflation the cap is expected to rise to $1.7 million around 2020-2021.
I already have more than $1.6 million in a tax-free pension. Am I affected?
Yes. You will need to remove the amount in excess of $1.6 million from your retirement account prior to 1 July 2017. You can either transfer it back into a super accumulation account, where earnings are taxed at the concessional rate of 15%, or remove it from superannuation entirely.
What happens if I don’t withdraw the excess or transfer more than the cap into a retirement account?
You will need to withdraw the excess, and until you do you will be liable to pay tax on the notional earnings on the excess amount. The tax rate is 15% for the first breach, and 30% on subsequent breaches.
There is one concession. If your retirement account value is less than $1.7 million on 1 July 2017 you will have six months from that date to withdraw the excess without penalty.
If my retirement account balance increases due to investment performance, will I have to withdraw amounts in excess of the cap?
No. The cap only applies to the amount transferred into the retirement phase account. It does not apply to subsequent earnings.
Can I make more than one transfer into the retirement account?
Yes, provided the available cap has not been exceeded. For example, if you transfer $800,000 in July 2017 you will use 50% of your cap. In a few years’ time, with indexation, when the cap rises to, say, $1.7 million, you will still be able to access 50% of this new cap, which means you can add up to $850,000 to your retirement account.
If you establish your retirement account with the maximum permissible amount (i.e. $1.6 million) you will use 100% of your cap and will not be allowed to contribute additional amounts.
Do transition to retirement income streams count towards the cap?
No, because from 1 July 2017 these income streams will lose their tax exemption. However, once a condition of release has been met, the transfer balance caps will apply to the TTR pension as it will become a standard account based or allocated pension.
How are defined benefit pensions and other non-account based pensions treated?
The treatment of defined benefit pensions and other non-account based products is complex. It depends on the type of pension or annuity, the tax status of its components, and the annual income it pays. If your pension is valued at more than $1.6 million, you won’t need to withdraw the excess, but you may be subject to tax on annual payments of more than $100,000. You will need to contact your pension or annuity provider to find out how you will be affected.
What do I need to do right now? What do I do with the excess? Do I use up my entire cap now or keep some for later?
The answers to these questions all depend on your personal circumstances and long-term goals. Good advice is essential, so the sooner you speak to your licensed financial adviser, the better.